Activision Blizzard Stock Is Undervalued And Is Likely To See Higher Levels

by Trefis Team
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ATVI
Activision Blizzard
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[Updated: 8/6/2021] ATVI Stock Update

Activision Blizzard (NASDAQ: ATVI) recently reported its Q2 results, which were better than the street estimates. The company reported revenues of $1.9 billion, in-line with our forecast, and higher than the consensus estimate of $1.8 billion. The company’s adjusted EPS of $0.91 was well above $0.78 per Trefis and $0.75 consensus estimates. All three segments – Activision, Blizzard, and King – saw a y-o-y decline in sales. This is due to a tough comparison to the prior year quarter, which benefited from Covid-19 related lockdowns, as people were confined to their homes, eschewing more public forms of entertainment. This resulted in higher user-engagement levels for Activision Blizzard. However, the engagement levels remain much higher than they were before the pandemic, a trend likely to continue going forward.

Looking forward, the company has raised its outlook for revenues to be around $8.6 billion, and adjusted EPS to be $3.54 for the full-year 2021. Despite an upbeat quarter, and a strong outlook, ATVI stock hasn’t seen much appreciation since it reported the Q2 earnings. In fact, it is down 14% over the last one month. This can be attributed to a recent sexual harassment and discrimination scandal, and a California based agency filing a lawsuit against the company. While the company’s management has stated that it has taken important steps and it will continue to take necessary actions to address any cases of discrimination or harassment, the scandal hasn’t been received well with the investors.

That said, we maintain our Activision Blizzard Valuation of $119 per share, based on expected adjusted EPS of $3.85 and a P/E multiple of 31x, reflecting a solid 45% premium to the current market price. In fact, the average price of analysts’ estimates stands at $117. This suggests that ATVI stock is significantly undervalued at the current levels, and investors can use this dip as a buying opportunity for long term gains.

 

[Updated: 6/29/2021] Activision Blizzard Q2 Earnings Preview

Activision Blizzard (NASDAQ: ATVI) is scheduled to report its Q2 2021 results on Tuesday, August 3. We expect the company to likely post revenue and earnings above the consensus estimates, primarily led by continued growth in the Call of Duty franchise as well as World of Warcraft. Activision Blizzard should see an overall pickup in demand due to higher gaming engagement levels seen over the recent quarters.  We expect the company to navigate well based on these trends over the latest quarter.

Furthermore, our forecast indicates that Activision Blizzard’s valuation is $119 per share, which is a large 40% premium to the current market price of around $85. Our interactive dashboard analysis on Activision Blizzard Pre-Earnings has additional details. Actually, the premium has risen over the last few days, given that ATVI stock saw a 6% decline in a single trading session on Tuesday, July 27. The decline came in after the company is being sued for a hostile work environment. Furthermore, the company’s initial response to the allegations angered its employees and hundreds of them staged a walkout. [1] How this impacts the company’s performance is yet to be seen, but surely this development didn’t bode well with the investors.

(1) Revenues expected to be slightly above the consensus estimates

Trefis estimates Activision Blizzard’s Q2 2021 revenues to be around $1.95 billion, slightly above the $1.85 billion consensus estimate. Despite the economies opening up with vaccination programs underway in multiple countries, the user engagement levels for gaming has remained on the higher side, aiding Activision Blizzard’s sales over the recent quarters. Furthermore, the company has been focused on its free-to-play offerings across mobile, PC, and console, given that it was able to add over 100 million players in a little over a year just for the Call of Duty franchise. The company is now replicating this free-to-play offering across its other franchises, which will likely result in an increase in user-engagement levels, and its in-game sales. Activision Blizzard’s Q1 2021 sales were also up 27% y-o-y to $2.3 billion, with growth seen in all of its segments. Our dashboard on Activision Blizzard Revenues offers more details on the company’s segments.

2) EPS likely to be slightly above the consensus estimates

Activision Blizzard’s Q2 2021 adjusted earnings per share (EPS) is expected to be $0.78 per Trefis analysis, slightly above the consensus estimate of $0.75. The company’s adjusted net income of $768 million in Q1 2021 reflected a solid 30% rise from its $591 million figure in the prior-year quarter, primarily due to higher revenues. For the full year 2021, we expect the adjusted EPS to be higher at $3.81 compared to $3.21 in 2020. The company has reduced its sales and marketing costs over the recent quarters, and we expect this trend to continue in the near term.

(3) Stock price estimate 40% above the current market price

Going by our Activision Blizzard’s Valuation, with an EPS estimate of $3.81 and a P/E multiple of 31x in 2021, this translates into a price of $119, which is roughly 40% above the current market price of around $85. In fact, at the current market price of $85, ATVI stock is trading at just 22x its 2021 EPS estimate of $3.81. The 22x figure compares with levels of over 26x seen in 2019 and a 29x figure seen as recently as late 2020, implying there is more room for growth in ATVI stock.

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year.

While ATVI stock can see higher levels, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for IAC vs. Activision Blizzard.

See all Trefis Price Estimates and Download Trefis Data here

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Notes:
  1. Blizzard employees walk out over company’s handling of discrimination, sexual harassment suit, Shannon Liao, July 28, 2021, The Washington Post []
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